Judge Dismisses Case Challenging Dodd-Frank's Constitutionality

A federal judge has dismissed a Texas community bank's case against key parts of the Dodd-Frank Act, arguing the institution, as well as the 11 states and two conservative groups backing it, have no legal ability to challenge the 2010 financial reform law.

U.S. District Judge Ellen Segal Huvelle said the case was "not ripe for review" because the bank and others could not prove financial injury resulting from Dodd-Frank.

"This is an unusual case, as plaintiffs have not faced any adverse rulings nor has agency action been directed at them," Huvelle said in the final order. "As a result, plaintiffs' standing is more difficult to parse here than in the typical case."

At issue was a case filed last year by the State National Bank of Big Spring and two advocacy groups that challenged the constitutionality of the Dodd-Frank Act with regard to "unbounded" powers given to the Consumer Financial Protection Bureau, the Financial Stability Oversight Council and other regulators.

The case was later joined by eleven state attorneys general, who focused solely on new powers granted to the Treasury Department that allow it to seize and dismantle a systemically important bank and nonbank.

Observers have long argued that the case was a losing battle because the only bank plaintiff has an asset size well below the CFPB's purview of $10 billion of assets and would therefore have difficulty proving financial harm.

But it gained momentum after the states joined the case, including Ohio, Texas and West Virginia. There was also the possibility that another case being reviewed by the Supreme Court that questions the President's recess appointment authority could help the State National Bank case, which also challenged the appointment of CFPB Director Richard Cordray. But Cordray was confirmed by the Senate last month, making that issue moot.

The plaintiffs' rejected the judge's reasoning and said Friday they plan to appeal.

"The district court's opinion is deeply flawed," said C. Boyden Gray, founding partner of Boyden Gray & Associates, who represents the plaintiffs, in a statement provided to American Banker. "State National Bank of Big Spring is a community bank that has served its community for generations, and it is disturbing that the opinion  and the government  ignored the very real harm Dodd-Frank has inflicted on it and the customers who rely on the bank to provide loans for everything from their home to their small business."

Gray said the judge was also wrong to dismiss the states' right to sue.

"The court's decision misconstrues the real and immediate loss of substantive rights that the states have suffered because of Dodd-Frank," he said. " If this decision stands, taxpayers and pension holders across the country will have no guarantee of being treated fairly or made whole in the event of a future financial crisis We will file a notice of appeal today."

In her order, Huvelle said the Texas bank couldn't oppose the CFPB's existence because of what it might do in the future.

"The bank's claims remain abstract until there is some regulation that actually causes harm or will plausibly harm in the near future," the ruling said.

While the bank had contended it needs to spend more money on compliance to deal with new CFPB regulations, the judge said the institution would have likely needed to incur higher compliance costs in any event following the financial crisis.

"If Dodd-Frank had never been passed, the Bank presumably would still have to spend money to learn about its compliance responsibilities under other federal and state regulations," the ruling said.